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Bull and bear: I’ll be back. QE set to return, but will ECB relent?

Bull and Bear: an optimistic and pessimistic view of investment news. Today’s stories include: I’ll be back: QE set to return, but will ECB relent? Barclays threatens to pull out of UK. Banks to shed more than 100,000 jobs. Gold valued in Australian dollars soars. House prices – the pendulum switches to price rises. Companies in the news: Microsoft, Berkshire Hathaway,Chariot Oil & Gas, and Avon Rubber.

I’ll be back. QE set to return, but will ECB relent?

The Fed will be making its monetary policy decision later today. Just a few days ago the consensus was for no more quantitative easing (QE) this year, but perhaps next. Now, few would be surprised if the Fed announced a new round of massive QE. Tomorrow will see the latest quarterly inflation report from the Bank of England. If the report doesn’t drop a hint that QE is on its way, it will be a big surprise. But still the European Central Bank stays firm. Its latest bond buying spree was not QE; it was funded in the conventional way, from deposits. Even then, the purchases went ahead despite German objections. The question is: will the ECB relent?

Bull:QE has its critics, but where would the global economy be without it? Probably the recession of 2008/09 would still be going strong. The UK has adopted the policy of fiscal austerity, monetary expansion. The ECB, by contrast, has been stuck in a time warp, fashioned during the days of the Weimar Republic. Germany may see inflation as public enemy number one, because of its pre Nazi era experience, but it is wrong.

Despite record low interest rates, equities and property prices languish way below the highs of a few years ago. The engine of global demand – the US consumer – is laid up in bed, with a thermometer in the mouth, and crying out for a hot toddy. Germany frets about inflation, while the demon called deflation lurks in the shadows. And the ECB adopts a series of quite extraordinary rate hikes, in the midst of this crisis.

The ECB is repeating the errors of Japan’s central bank of twenty years ago. It needs to slash interest rates, and engage in a massive round of QE. Only then can disaster be avoided.

Bear:But QE is fundamentally flawed. It involves pumping money into the economy via lending. And few individuals, companies, or even banks want to borrow.

The industrial revolution may have been partially funded by the discovery of gold in the New World. The money supply was boosted, without a corresponding rise in debt. It is not like that now. Central banks can create money to their heart’s content. All that we are seeing is a fall in the ratio of broad- to-narrow money.

If QE was used to fund investment into entrepreneurial companies, or fund massive infrastructure projects creating jobs, or even tax cuts, the side effect would be even greater government debts. And that is why QE is flawed.

Barclays threatens to pull out of UK

Bob Diamond, the chief executive at Barclays, recently said he was having great fun changing the bank, before he realised the implications if what he said and added “not that restructuring is fun.” Yesterday he made a comment which is likely to put the fear of god into the UK government. “It’s no longer a question of whether the Barclays wants to stay in the UK, but whether the UK wants Barclays,” he said. He was warning that if plans to separate high street operations from the so-called casino side of the business go ahead, the bank may pull out of Britain.

Bear:It all seems too rich for words. First the banks send the global economy into crisis, then they are bailed out, and now they are effectively threatening the UK with job cuts.

Bull:But Barclays was not bailed out. Casino banking did not cause the global crisis; it was sub-prime and mortgage securitisation, which were designed to reduce risk. Many of the banks that suffered the biggest problems, Northern Rick, HBOS, for example, had tiny, perhaps even non-existent investment divisions.

Bear:And yet banks are supposed to provide the lubrication the economy needs by taking money that some are saving, and lending it to others. That way, instead of lying idle, money is used to promote growth. But banks are not doing this. And while the short-term consequences of their actions may be higher profits, in the long term dynamism is sucked out of the economy, creating the risk of another banking crisis.

Banks to shed over 100,000 jobs

According to a report on Bloomberg, the world’s 50 largest banks are on course to make 101,000 job cuts this year.

Bull: One can feel sorry for those who lose their jobs, but the result is more efficient banks, which can in turn re-build balance sheets all the more rapidly, and in the process make more money for their shareholders.

Bear:But the service from banks is just getting worse. Customer service is out of the window – does anyone like ringing call centres? In the longer term, by making job cuts, banks are making the overall economy weaker. Restructuring is good for the economy when there are plenty of opportunities out there for displaced workers. But this is patently not the case at the moment.

Gold and Swiss franc rise some more

Bull:Gold is setting new records with almost tedious regularity, at the moment. Meanwhile, the Swiss franc is approaching a record high against the euro, which itself is near a record high against the dollar. As for US and UK ten year bonds, the yield is still floating around the level of the all-time low.

Bear:But the rush to safe haven is the problem. The more money that goes to bonds, the more dangerous the global economy becomes.

Ironically, the recent flight to US bonds is almost masochistic. It is causing uncertainty across the globe, which in turn weakens the US and makes US bonds less safe. The Swiss economy is sure to wilt under the strong franc. Swiss authorities are looking at ways of pushing the currency down, and fear a sharp loss in competitiveness.

Meanwhile, shares in emerging markets fell sharply yesterday, with the Brazilian market down almost 10 per cent at one point. The Russian Micex was down 5.5 per cent. At close of play yesterday, the Indian Sensex stood at 16,990, compared with just over 19,000 a month ago. At the time of writing, the Hang Seng was off 1159, or 5.6 per cent.

House prices: the pendulum switches to price rises

The latest housing survey from the Royal Institution of Chartered surveyors was out this morning, and bizarrely it pointed to price rises over the next few months.

Bull: The headline index is still negative, but at minus 22 it improved on last month’s reading of minus 27. But the index tracking new enquiries rose to plus 5, the highest reading since May last year. The index tracking instructions fell to minus 7, the lowest level since December. And the gap between the two indices, which may be an indication of the changes in demand and supply, was plus 12. The last time the enquiries index exceeded instructions by that amount was in October 2009.

Bear:And yet, the turmoil on the markets shows the true underlying picture. The truth is that both demand for and supply of property is extremely low. A small change in either can have a fairly big impact on price. But, in current circumstances, it is hard to see how the changing relationship between enquiries and new instructions can really lead to higher prices.

Companies in the news

The flight to cash generation and Microsoft

Bull:In the ‘FT’, LEX pointed out that during the last period of stock market turmoil 2007 -2009 Walmart was one of just five S&P 500 companies to see its share prices rise. It was its ability to generate cash that proved so popular with investors. This time around Lex reckons companies that generate cash and that may benefit from the weak dollar will do well, and that leaves it recommending Microsoft.

Meanwhile ‘CNNMoney’ looked at the four remaining US companies that still have a triple A credit rating, according to Standard and Poor’s. They are Automatic Data Processing, Exxon Mobil, Johnson & Johnson, and Microsoft.

That name Microsoft keeps cropping up

Bear: Do you think Lex and Standard and Poor’s have heard of the iPad, and Linux. Right now, the Microsoft business model is facing its biggest test in years.

Berkshire Hathaway

Bull: If market turmoil spells buying opportunity, then is there a better person to smell out these opportunities than a certain Warren Buffett? Lex looked at Berkshire’s plans regarding buying Transatlantic Holdings, an insurer that used to be part of the AIG empire. Lex said: “Berkshire may not do hostile bids or auctions, but it still does opportunistic knockout bids at fat discounts to book value.“

Bull:Meanwhile, ‘The independent’ tipped Chariot Oil & Gas, and Avon Rubber as buys. The former has managed to agree a joint venture with BP in exploring for oil off the Namibian coast, and the latter has agreed a deal for supplying gas mask filters for the US Department of Defense.

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